Industry financial forecast update
2016 began on a positive note for air transport, leading to a modest upwards revision of our forecast for the industry’s financial performance. While returns are expected to exceed the cost of capital for the second consecutive year, this does not result in outsized investor returns compared with other sectors. At the regional level, performance remains widely divergent, with North America the clear standout performer. Middle East carriers are expected to generate moderate returns in 2016 but for African airlines another small loss is expected.
Financial performance improved in 2015…
In 2015, more airlines, in more regions, generated a return which exceeded the average cost of capital. That this performance wasn’t just limited to Nth American carriers (as was the case previously) was a pleasing development for the industry.
…with the 2016 outlook revised a little higher
Net post-tax profits are forecast to be $39.4 billion in 2016, with an operating (EBIT) margin of 8.8%. Both of these represent a modest gain on last year but only the 2nd year of ‘normal’ returns to investors.
Improvement is also evident across a number of credit metrics, with net debt adjusted for operating leases, forecast to decline from 4x to 3.6x EBITDAR this year, for example.
What is driving this performance?
It’s not just lower oil prices giving a boost to industry financial performance, although this has certainly contributed to an improved operating margin. But importantly, capital productivity has also risen, partly through extending aircraft lives as well as by the addition of ancillary services to the product mix.
Regional outlook remains very mixed
Notwithstanding the positive industry-wide outlook, the regional performance is expected to remain quite diverse. In part, this reflects the patchy nature of the regional economic backdrop.
The 2016 outlook is again buoyed by Nth America which is expected to account for ~60% of industry profits. Middle East carriers are forecast to deliver moderate profits of ~$1.7bn in 2016, with an EBIT margin of 3.2%. African carriers, however, are forecast to generate another small loss this year.
What are the main risks to the outlook?
As always there are risks to the forecasts, including:
The global macro-economic performance remains tentative and momentum is easing;
International trade growth is lackluster, at best;
Oil prices have risen over 2016 to date, but the outlook remains very uncertain; and
Infrastructure use costs continue to rise, and improved industry returns may tempt some governments to revisit taxes and charges.
One final thing…
The full forecast reports are available on IATA Economics app and on the Regional Economic Briefings page.
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IATA Economics, July 2016